"Fiscal neutrality" was what we were promised from yesterday's Budget. And fiscal neutrality was what we got, according to the Chancellor's economic watchdog, the Office for Budget Responsibility (OBR).
Robert Chote and his small team of economists said that the various fiscal takeaways and giveaways announced by George Osborne yesterday will "broadly balance" over the coming five years. What this means is that nothing the Chancellor spoke about at the Despatch Box in the Commons yesterday will change the overall borrowing and spending picture over the next five years.
True, putting £28bn of Royal Mail pension fund assets on to the public balance sheets, as the Government plans, will flatter the annual borrowing figures in the near term. But this is no windfall because the Treasury will also be taking on around £37.5bn in liabilities from the pension scheme too, which will have to be paid out over the next two decades.
MPs on both sides of the house were getting excited about the various income tax changes unveiled yesterday, but in broad economic terms yesterday's Budget was really a non-event. The austere course that George Osborne laid out in his emergency Budget of June 2010 remains the one on which the UK economy is travelling.
The OBR repeated its verdict that the chances of the Chancellor fulfilling his self-imposed "fiscal mandate" – balancing the current spending budget in five years time and bringing down the national debt by 2016 – are greater than 50 per cent. In fact, the OBR was somewhat more optimistic about the outlook for public finances than the last time it marked the Chancellor's economic books at the time of the Autumn Statement last November.
The watchdog predicted that the Government will borrow £126bn in 2012, fractionally less than it expected four months ago. And the OBR now sees the state borrowing £11bn less over the next five years than it anticipated in November.
Borrowing in 2012-13 will be £120bn. In 2013-14 it will be £98bn. And in 2016-17, it will fall to £21bn. By that stage, according to the OBR, the Government will have achieved its goal of running a small budget surplus on current borrowing. At that point, Mr Osborne will be able to say (assuming he is still Chancellor in five years) that he has succeeded in balancing the nation's books.
The OBR also says that the Chancellor is fairly set to fulfil his other goal, of putting the national debt on a downward trajectory by the end of the Parliament. Public sector net debt is now expected by the OBR to rise from 63.7 per cent of GDP this year, reaching a peak of 76.3 per cent in 2014-15, before falling back to 76 per cent the following year. As the charts above demonstrate, this is a marginally better picture than November, when the OBR, spooked by the eurozone soverieign debt crisis, enacted deep downgrades to its public borrowing forecasts. Indeed, this was something of a momentous day for the OBR. This was the first time in two years that the fiscal watchdog has been able to revise its public finances projections in a positive direction.
But is it justified in doing so? Until yesterday most economic analysts would have found that OBR's public finances upgrades quite reasonable. Over the course of the 2011-12 financial year, so far, tax receipts have been coming in considerably better than the OBR anticipated at the time of the last Budget. And government departments were showing remarkable spending restraint. January, when there is always a splurge of income tax and corporation tax returns, was a bumper month for receipts. Many analysts were left pleasantly surprised.
But yesterday, as chance would have it, that encouraging trend came to an abrupt halt. The ONS public borrowing figures for the month of February – released just hours before the Chancellor stood up to speak in the Commons – showed a remarkably different picture. Government borrowing over the month came in at a record high of £15bn, double what City analysts had expected. Now the fear is that the impact of a slowing economy is finally beginning to blow the public finances off course.
The ONS has cautioned against drawing too many conclusions from one month's public finances figures. But the markets will be watching the UK even more closely now. Two credit ratings agencies, Fitch and Moody's, have warned in recent months that even though the Chancellor has demonstrated his commitment to fiscal rectitude by implementing the deepest cuts to public spending since the Second World War, the UK's AAA rating is, nevertheless, in jeopardy.
The reason? A depressed growth outlook. The credit rating agencies have effectively warned that the British economy is in danger of experiencing paradox of thrift, where cuts in government spending serve to depress economic activity, rather than bolster investor confidence. This, in turn, leads to falling tax revenues and stubbornly high budget deficits. Austerity thus proves counterproductive.
The credit ratings have had a wretched record in recent years, having awarded AAA status to thousands of toxic mortgage securities during the boom. The Chancellor will be praying that they have got it wrong once again – and that his OBR has got it right.